The City and County of Denver is planning to spend $75,000 on a study to identify office buildings that might be profitably converted to residences, in order to help alleviate the city’s housing shortage. It’s a reasonable response, given the number of vacant or nearly-vacant downtown office buildings post-Covid.
At the same time, the state House of Representatives has passed a bill that would give municipal governments a right of first refusal on the sale of any such property.
That these two actions are at cross-purposes didn’t prevent Rep. Leslie Herod, candidate for Denver mayor, and Rep. Selena Gonzales-Gutierrez candidate for an at-large Denver City Council seat, from voting for yes the bill.
On the surface, converting office buildings to housing looks very appealing. Large, multistory buildings look similar from the outside, already have elevators and in some cases, balconies. Their location is ideal for those looking for greater density without having to put up apartment blocks next to single-family houses. And they can provide hundreds of units without having to tear down and build from scratch.
As more white- and pink-collar employees work from home, many office buildings have zero or very low occupancy, and that situation doesn’t look as though it will change any time soon. Downtown has suffered greatly since 2020, to the benefit of locations like Cherry Creek and Golden. So for Denver to try to make it more appealing to convert buildings to much-needed housing seems like an obvious win-win.
Still, such conversions are expensive, so the price of a candidate building needs to fall to the point when there returns on investment are attractive. For example, plumbing needs to be extended from bathrooms shared by a floor to individual dwelling units. Real walls need to go up between those units and to the interior corridors. Also, the ideal candidate buildings are old, where much of Denver’s downtown office space is recent. Because of this, hotels are often better conversion choices that office space.
Still, to the extent that the study leads to regulatory changes that make it easier to do these conversions, and doesn’t merely identify particular buildings for special treatment, or have the city government rule out a building as impractical, it could be $75,000 well spent.
Enter the state legislature with House Bill 1190, which would give municipalities the right to exercise or delegate a right-of-first refusal on all sales of multifamily housing with five units or more. The municipality could voluntarily waive the right on any property, but if it chose to exercise that right, it would have to commit to turning the property into affordable housing for at least 50 years. If the private buyer were to make the same commitment, then the municipality would lose the right to match the offer.
The government would have 14 days to notify the seller that it was exercising its right to buy, and 120 days to complete the sale. The government’s offer would have to be “substantially economically identical” to the original offer, a term which has no current definition under Colorado law, but which would probably mean that the proceeds to the seller would be the same, and the closing date would be the same.
But the effects would be devastating, and would have the effect of reducing available housing in the long run. In a volatile market, the seller could find themselves challenging whether or not the government’s offer was identical, only to find that the original buyer had given up on the deal for a better one, or none at all. Indeed, when a potential buyer knows that any offer puts them in a one-bid bidding war with the government, where to tie is to lose, buyers may be hard to come by. And a side-effect of the bill will be to put more property in government hands, reducing the property tax base.
Moreover, the proposed law wouldn’t merely endanger that one transaction, it could endanger multiple transactions. In a so-called 1031 transaction, named for the relevant section of the Internal Revenue Code, a seller reinvests the proceeds into a new property in order to defer taxes on the original sale. Those transactions have to be completed within 180 days of the original sale. Depending on the timeline, the seller in the original transaction – the buyer here – might find itself having minimal time to find a substitute property to roll over the proceeds. Not only is the resale discouraged, so is the original sale.
And those chains don’t have to stop at two. Chains of multiple 1031 transactions are not uncommon. All it would take to throw then entire chain into chaos would be for the government to step in a buy any of the intermediate properties.
Given the uncertainty that HB-1190 would create, why would any developer convert a vacant commercial property into a residential one?
I don’t think it’s the intent of majority Democrats to destroy the Denver housing market. But between this bill, the rent control bill, the so-called “tenants rights” bill that would make evictions all but impossible, if that were their goal, what would they be doing differently?
Joshua Sharf, a Denver resident, is a senior fellow in fiscal policy at the Independence Institute, a free market think tank.
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